Main Street
How High Should the Fed Go?
By Tara Kalwarski

(MONEY Magazine) – The Federal Reserve began a "measured" pace of quarter-point increases in short-term rates a year ago, when it became clear that the economy no longer needed ultralow borrowing costs to stimulate growth. Another quarter-point hike (to 3%) in the Fed funds rate was expected in May, and the question arises: Have Greenspan & Co. gone too far or not far enough? The increases seem to be slowing the economy. Disappointing spending data have many analysts lowering their growth forecasts. At the same time, inflation is increasing. Core consumer prices were up 0.4% in March--the biggest monthly jump in more than two years. So what will the Fed do? "History tells you that the Fed does not stop raising until they see discernable signs that the economy is slowing," says Merrill Lynch senior economist Sheryl King. She worries that if rates go to 3.5% by August, the economy will really suffer. But Peter Kretzmer, senior economist at Bank of America, says the Fed must stay focused on inflation. Still, he thinks energy prices, not rates, are the big story. "Unless they abate, we'll continue to get more inflation and less growth."